Herbalife is global giant with business model in question

Stuart Pfeifer, Los Angeles Times

Stock spotlight is a new weekly feature that will profile a notable, public company.

FOR THE RECORD:Herbalife: A caption for a photo with the Stock Spotlight column in the Feb. 25 Section A said customers were participating in an exercise session at an Herbalife health club in Artesia. In fact, the exercise session was in Torrance and was hosted by an independent Herbalife distributor. —

The business: The company sells weight-loss, nutrition, hair- and skin-care products in more than 80 countries, utilizing independent distributors who profit from their own sales and sales from others they recruit into the business. Its top-selling product is cookies and cream flavor Formula 1, a high-protein, meal-replacement shake mix. Herbalife does very little mainstream advertising and does not sell products in retail stores. Instead it relies on a network of independent distributors who recruit customers, counsel them about nutrition and fitness and sell them products. The company recently agreed to a $44-million, 10-year deal to sponsor the Los Angeles Galaxy professional soccer team, one of many professional sports clubs it supports around the world.

The latest: Wall Street veterans say they've never seen a fight like this.Noted hedge fund managers Bill Ackman and Carl Icahn have engaged in a heated debate about Herbalife's business model, with billions of dollars at stake. Ackman has taken a $1-billion "short position" against the company's shares, meaning he'll profit if the stock price drops. In a slick, multimedia pitch on Wall Street, Ackman contended that the company is a well-disguised pyramid scheme. He said the vast majority of the company's independent distributors make little money or lose money, while a fortunate few get rich off commissions they receive for recruiting others into the business. Ackman said he expects Herbalife's shares to hit zero. Icahn said he has purchased nearly 13% of the company's shares and planned to talk to executives about strategies to increase its profitability, including taking it private. Herbalife acknowledged discussions with Icahn but did not elaborate. The company insists its business model is completely legal. Herbalife said it sells products that help people live healthy lives while giving entrepreneurs an opportunity to build their own businesses.

Accomplishments: The company reported record sales and profit in 2012 and said it expects things to improve in 2013. It has mountains of available cash, pays a decent dividend and repurchased 15 million — or more than 10% — of its shares in little more than a year.

Challenges: Herbalife shares have been extremely volatile in the last nine months, plunging more than 40% in the days after Ackman's attack, and falling 20% in a single day in May after hedge fund manager David Einhorn questioned the company's business model. Herbalife has acknowledged it is under review by the Securities and Exchange Commission. The Federal Trade Commission released dozens of complaints it has received about Herbalife in recent years. Neither agency has confirmed an investigation.

Analyst opinions: Seven analysts have the stock as a buy or strong buy, while four have it as hold. The average one-year target price is about $58 a share.

"Buckle up, it's going to be bumpy.... We are maintaining our overweight, but recognize that the stock is not for the faint of heart. We expect Mr. Ackman to continue to make noise on his short thesis, however, and for the potential for an FTC investigation to be an overhang on the stock for the indefinite future." — Brian Wang, analyst, Barclays Capital;

"It is clear that over time Herbalife is answering the questions that need to be answered and providing greater clarity around their business model — one that we see as simple but effective. We think it logical that, as these questions are finally answered to the investment community's satisfaction, the shares will trade, finally to the premium valuation we believe it deserves. The scarlet letter it wears today in the minds of the short seller community will be removed." — Timothy Ramey, analyst, D.A. Davidson & Co.